Returns Are Gaining Momentum At Vodatel Networks Holdings (HKG:8033)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Vodatel Networks Holdings (HKG:8033) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Vodatel Networks Holdings, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.026 = HK$4.7m ÷ (HK$332m - HK$150m) (Based on the trailing twelve months to June 2021).

Therefore, Vodatel Networks Holdings has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 7.0%.

View our latest analysis for Vodatel Networks Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Vodatel Networks Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

While the ROCE is still rather low for Vodatel Networks Holdings, we're glad to see it heading in the right direction. The figures show that over the last five years, returns on capital have grown by 439%. The company is now earning HK$0.03 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 24% less capital than it was five years ago. Vodatel Networks Holdings may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 45% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Vodatel Networks Holdings' ROCE

In summary, it's great to see that Vodatel Networks Holdings has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 39% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One final note, you should learn about the 5 warning signs we've spotted with Vodatel Networks Holdings (including 2 which can't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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